What Happens to Your Money When Your Bank Fails
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
Two recent bank failures have not only stoked fears of a 2008-like financial crisis but have also prompted questions about the stability of the financial system, so much so that President Joe Biden sought to ease investor concerns about the strength of the country's banking system.
Bank failures aren't outside the realm of possibility. From 2008 to 2011, regulators closed over 400 banks representing assets of about $680 billion. The pace of bank closures has slowed in recent years, however. Only four banks failed in each of 2019 and 2020, with no financial institution going under in 2021 and 2022. That's why the sudden shuttering of two banks has shaken the markets and raised fears of a potential contagion.
Banks can fail for various reasons like bad lending, fraud, or an asset-liability mismatch. Savers often take bank failures as an indicator of a looming recession. But when a bank fails, your money is insured up to the federal insured level. Here is what happens to your money when a bank goes under.
Jump To
So, what happened?
Two banks – California-based Silicon Valley Bank and New York-based Signature Bank – were recently seized by federal regulators within a span of two days. SVB, as it's commonly known, became the largest bank to fail since the Great Recession and the second-largest bank failure overall. As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.
As is common for financial institutions, SVB invested in Treasury and mortgage bonds hoping to make a return. But these holdings turned sour as the Federal Reserve began to raise interest rates and newer government bonds paid more in interest. The bank sold investments to meet redemption requests from its predominantly start-up client base and lost about $2 billion. This public disclosure set off a panic, and more withdrawal requests started pouring in.
Signature Bank had total assets of $110.4 billion and total deposits of $88.6 billion as of December 31, 2022. Signature Bank's clients also included start-ups, and the bank in 2018 started taking crypto deposits. Slowing venture capital funding forced many of its clients to access their accounts more.
What does the FDIC do?
The FDIC was created in 1933 following thousands of bank failures in the 1920s and early 1930s. The regulator's mandate includes:
- Insuring deposits
- Examining and supervising financial institutions
- Managing receiverships
Since the start of FDIC insurance in 1934, no depositor has lost insured funds due to a failure. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. But how does the FDIC get this money? From the banks. Each bank has to pay the FDIC premiums for coverage just like you do for your vehicle or home.
As a depositor, you don't need to apply for deposit insurance; your coverage kicks in automatically once you open an account with an FDIC-insured bank. When selecting a bank, it's important that you choose one that offers deposit insurance protection.
LightStream online lending offers loans for auto, home improvement and practically anything else, at low rates for those with good credit.
Low fixed rates from 6.99%—25.49%
Can't the FDIC just increase the limit?
It can, but that would require getting Congress' blessing. The current limit of $250,000 was increased from $100,000 during the Great Recession in 2008. But with the president being a Democrat, the Senate controlled by the Democrats and Republicans enjoying a majority in the House, any measure to increase the limit is unlikely to see daylight, Mel Casey, senior portfolio manager at FBB Capital Partners, told JoyWallet.
But this wasn't the case with Signature Bank and SVB. Because regulators deemed them a systemic risk, the government made an unprecedented decision to guarantee all deposits — $175.4 billion for SVB and $88.6 billion at Signature Bank. Nevertheless, Casey said this doesn't represent a shift from the FDIC's policy.
What the FDIC covers and what it doesn't
It's important to note that the FDIC only insures deposits, not securities or mutual funds.
Here's what the FDIC covers:
- Checking accounts
- Negotiable order of withdrawal accounts
- Savings accounts
- Money market deposit accounts
- Time deposits such as certificates of deposit
- Cashier’s checks, money orders, and other official items issued by a bank
And these are items not covered by FDIC insurance:
- Stock investments
- Bond investments
- Mutual funds
- Life insurance policies
- Annuities
- Municipal securities
- Safe deposit boxes or their contents
- U.S. Treasury bills, bonds or notes
Here are the different FDIC ownership categories and their insurance limits:
Single accounts (owned by one person) | $250,000 per owner |
Joint accounts (owned by more than one person) | $250,000 per co-owner |
Certain retirement accounts, including IRAs | $250,000 per owner |
Revocable trust accounts | $250,000 per owner per unique beneficiary |
Corporation, partnership and unincorporated association accounts | $250,000 per corporation, partnership or unincorporated association |
Irrevocable trust accounts | $250,000 for the noncontingent interest of each unique beneficiary |
Employee benefit plan accounts | $250,000 for the noncontingent interest of each plan participant |
Government accounts | $250,000 per official custodian (more coverage available subject to specific conditions) |
What happens to your money when a bank fails?
In general, your money is safe. But it gets a little tricky if your deposits exceed the FDIC coverage limit of $250,000 per depositor, per bank. If that's the case, anything over $250,000 isn't generally covered (this wasn't the case with SVB and Signature Bank). This is what it can look like:
- You have $250,000 in the bank: If you have up to $250,000 deposited in a bank seized by regulators, you can rest assured that you won't lose a penny.
- You have more than $250,000: As noted, there's a likelihood you'll lose anything over the limit. But don't lose hope: A depositor with more than $250,000 is given a receiver's certificate as proof of this claim. You will receive payments once the bank's assets are liquidated. In addition, it is possible to have more than $250,000 at one insured bank and still be fully insured as long as these deposits are maintained in different categories of legal ownership.
When will you get the money?
While not all bank failures are created equal, the FDIC follows standard policies and procedures in making depositors whole. The FDIC is mandated to make your insured deposits available as soon as possible. The regulator's goal is to make deposit insurance payments within two business days of the failure of the insured institution. Usually, if a bank is closed on a Friday, it's business as usual on Monday.
However, some deposits can take time. For example, accounts linked to a formal written trust agreement and funds placed by a fiduciary on behalf of an owner require supplemental documentation from the depositor. The timing is based on the depositor providing the required documentation to the FDIC, which will then determine insurance coverage.
Does interest stop accruing on deposits?
Before diving into that, let's first look at the two types of bank failures because the answer depends on how the FDIC closed a bank.
- The failed bank is acquired: The FDIC's preferred and most common method entails a healthy bank taking over the failed bank's insured deposits. Insured depositors of the failed bank immediately become depositors of the acquiring bank and have access to their insured funds.
- No one wanted to buy the failed bank: If no financial institution is willing to acquire the deposits, the FDIC will pay the depositor directly by check up to the insured balance in each account. These payments usually begin within a few days after the bank's closing.
If your bank failed and was acquired by another bank, then the acquirer becomes responsible for re-establishing interest rates and beginning the accrual of interest after the date of the failure of the bank. The acquiring bank has the leeway to change interest rates on the acquired deposits, but the depositor is also allowed to withdraw their insured funds without penalty. However, if the failed bank wasn't acquired, then interest simply does not accrue past the date of failure.
LightStream online lending offers loans for auto, home improvement and practically anything else, at low rates for those with good credit.
Low fixed rates from 6.99%—25.49%
What about direct deposits?
If your bank fails and it is bought, all direct deposits, such as Social Security payments, will automatically be redirected to the deposit accounts at the acquiring bank. But if the bank isn't acquired, the FDIC will temporarily find a nearby bank to take over the direct deposit function.
Access to safe deposit box
When another acquires the failed bank's deposits, the branch offices usually reopen the next business day. This is when you can access your safe deposit boxes. If the bank isn't acquired, the FDIC will send a letter informing you of the bank's closure and how you can remove the contents of your box. In any case, the contents of your safe deposit box can be accessed the next business day after the closure.
Are there other financial safety nets available if your bank holds risky securities?
One word: Diversification. If you have a large cash balance, it would be wise to spread it out among several institutions so no one bank has more than $250,000 of your money.
"The other teachable moment from this experience is to broaden our definition of 'risky securities,'" Casey said. "The securities banks owned during the Financial Crisis were risky because the value was hard to determine, and many loans were unlikely to be repaid. In the current crisis, however, he said banks own high-quality U.S. government debt, which had greater sensitivity to interest rate moves, which spelled SVB's doom.
As the value of these bonds has declined, banks need to sell securities to fund outgoing deposits. Regarding digital assets (Signature Bank took on crypto deposits), Casey pointed to how they're loosely regulated and prone to high volatility, which is something to consider when choosing a financial institution to bank with.
Should you continue to invest in value stocks?
"Although banks are generally considered value stocks, this particular crisis unfolded within a subsector of banks with strong growth profiles and direct exposure to the technology sector and the high-net-worth coastal regions," Casey said. However, recent market events haven't spooked investors who believe in identifying undervalued companies with predictable cashflows. If anything, he said, a shift in consumer behavior stemming from these events will benefit large banks in the long term.
How to protect yourself against bank failures
Don't put your eggs in one basket
FDIC insures up to $250,000 per depositor, per bank. This is an important distinction because it means you can spread your assets across different banks, so you don't run afoul of the FDIC's limit. As Casey said, you can deposit up to $250,000 in one bank and another $250,000 in another financial institution. This ensures you're insured for all $500,000.
Read the news
Following the news cycle and trends can help you stay informed on what's happening in the markets. This allows you to move funds from your bank as and when appropriate. A few tell-tale signs of financial trouble include a declining stock price, negative news reports, and regulatory actions. However, these signs are merely an indicator, and you should dig deeper; you cannot discern a bank's financial condition from the outside.
Choose a financially sound bank
Before opening a bank account, it's important you do some homework. All banks insured by the FDIC have this information front and center on their website. Choosing an FDIC-insured bank should be your top priority. You should also look at the bank's financial strength. It's also important that you keep an eye on account activity and report any suspicious activity to the bank.
LightStream online lending offers loans for auto, home improvement and practically anything else, at low rates for those with good credit.
Low fixed rates from 6.99%—25.49%
The bottom line
Regulators seize a bank when it cannot meet its obligations to depositors and others. Bank failures were a weekly occurrence during the 2008 financial crisis. Still, two recent bank failures in 2023, after no such closures in the preceding two years, have jittered investors and depositors alike.
But in the event of a bank failure, your deposits are insured up to $250,000 per depositor, per insured bank. You will receive payments if you have more than that, as the bank's assets are liquidated. The FDIC aims to make deposit insurance payments within two business days of a bank's failure.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
Share this article
